Step Cost

A step cost is a cost that is fixed over a small volume range, but is variable over a large volume range. A step cost is also a fixed cost that rises to a new level in step with the significant changes in activity or usage. It is a cost that does not change steadily, but at discrete points. For example, is a facility cost remains steady until additional floor space is constructed, at which point the cost will increase to a new and higher level.

Step costs can also be delayed by using new work methods. These methods can significantly increase the activity levels that must be reached before new step costs must be incurred. Let us consider that an automated shrink-wrapping machine can substantially increase the number of pallets that a single shipper can handle in a day, while a good preventive maintenance machine routine can reduce the amount of machine downtime, thereby increasing utilization rates and delaying the need for more production equipment.

A step cost can be variable or fixed. Step variable costs have small steps and step fixed costs have large steps. They are dependant on the size of the “step” change (small or large, respectively) that occurs relative to the change in activity. Accountants select a relevant range that allows step variable costs to be treated as variable and step fixed costs to be treated as fixed. A step cost varies with the cost driver but does so in steps. Step costs have the characteristics of clerical tasks such as order filling and claims processing.  An example of step costs is the salaries of the supervisors’ when the companies hire additional supervisors as the production increases. Step costs are also referred to as the step fixed costs and the step variable costs.

Questions

• What is a step cost?
• What are the categories of step costs?